Kevin Depew

Feb 09, 2009 3:55 pm

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5. Five Deflationary Forces to Watch Now

Zimbabwe. Wheelbarrows full of dollars. Hyperinflation. Barely a day goes by without someone warning me of the hyperinflationary collapse hanging over our heads.

A couple of weeks ago it was Morgan Stanley (MS) ringing the hyperinflation bell, warning that "with policymakers around the world throwing massive conventional and unconventional monetary and fiscal stimuli at their economies, we think that it is worth exploring the black swan event of very high inflation or even hyperinflation."

Which is true, but misses the point. And what is the point? Demand.

Look, the reality is that the economics of credit creation is no different than the economics behind the creation of all goods and services. It's a story with two sides: supply... and demand.

Perhaps because the secular credit expansion comprised a span of more than 20 years, many people, including Washington politicians and mainstream economists, are making the mistake of focusing only on the supply of credit. The demand, they assume, will always be there. And that is a false assumption.

Yes, inflation will one day be a reality, but that reality is so far into the future it might as well be behind us.

Meanwhile, there are at least five deflationary forces in the present one should focus on, leaving the inflation concerns for a future date, because a person could go broke preparing for inflation when we are barely a third of the way through a deflationary debt unwind:

1. Including the underemployed, we have a "real" unemployment rate of nearly 14%.

2. Thus, labor costs are rapidly diminishing.

3. Meanwhile, inventories and capacity remain extraordinarily high.

4. And credit is tightening even as credit demand is plummeting.

5. Finally, these changes in consumption are secular, not cyclical; driven by a combination of forced and voluntary thrift.